The recent price action in the G10 FX markets seems to suggest that G10 inflation releases matter less these days. Case in point is the GBP that lost ground in the wake of the disappointing CPI print on Tuesday to only recoup most of the losses the next day on the back of a decent if not stellar labour market data release. EUR is another currency that seemingly defies the gravity pull of weaker inflation prints in recent months. On the other side of the fence are the two scandi currencies – NOK and SEK – that struggled to extend their recent gains despite better than expected core inflation data in recent days.

The common denominator that can explain the lack of sustained FX response seems to be the fact that inflation is not enough to change the relative policy outlook for the respective central banks. Indeed, most of the MPC members will still tell you that the inflation undershoot is only temporary while the Governing Council members will indicate they need more data to assess whether QE was successful or not. Both Riksbank and Norges Bank seem quite willing to accept higher inflation and remain committed to keep their currencies close to the lows.

So, where does this leave us ahead of the US inflation data later today? Does inflation really matter? Going into the US CPI print consensus is for a contraction in the annual headline inflation and stable core inflation print. If confirmed, the outcome may have less of an impact on market Fed rate hike expectations.

Indeed, market bets on Fed lift-off were pushed back as far as next April after the weak retail sales and PPI inflation released yesterday. The correction in both Fed rate hike expectations and USD is starting to look excessive and we believe that it would take a really weak CPI print today to see a continuation of the recent market moves. A stronger print may give the USD some breathing space. It may be too early for a rebound, however, with markets remaining cautious ahead of the IP tomorrow.

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